High Inflation, Hyperinflation and Explosive Roots: The Case of Yugoslavia

Abstract

The focus is on ’explosive root VAR’ modelling of money, prices, wages, and exchange rates applied to the Jugoslav high inflation/hyperinflation transition period from a centrally planned economy to a more market oriented economy. The I(2) model, which has previously been used to estimate the Cagan model for hyperinflation, is shown to yield incorrect inference when there are explosive roots in the data. The paper develops an econometric framework for the empirical analysis of hyperinflationary episodes and illustrates the importance of exploiting the system dynamics of all the variables in the system for a full understanding of the hyperinflationary mechanisms. The empirical results suggest that excessive nominal wage claims, inflationary expectations and the rate of currency depreciation were the main causes to the Yugoslav hyperinflation rather than the financing of government debt by money printing.Explosive roots; Hyperinflation; Polynomial Cointegration; Transition Economies